Burning Down the House

Guest Post by Rudy Havenstein

While I may check in tomorrow, today is sort of my Friday, so I’ll clear off my ridiculously messy desk.

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Just another high:



Share of Net Worth Held by the Top 0.1% (99.9th to 100th Wealth Percentiles)

“The purpose of a system is what it does.”​

– Stafford Beer, The Heart of Enterprise (h/t Jim D.)







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From the WJS via Grant’s:

The ultrawealthy aren’t just pulling away from average Americans. Buoyed by a stock-market boom that has added trillions of dollars to their net worth, the extremely rich are even pulling away from other rich Americans.

The top 0.1% wealthiest Americans have seen their total wealth more than double since the end of 2019, according to new data from the Federal Reserve. The year the pandemic started was when the ultrawealthy began to pull away from other rich groups, according to a Wall Street Journal analysis of Fed data.

In dollar terms, the very richest Americans have gained a total of $14.5 trillion in wealth over that period, with most of that—about $10 trillion—coming from gains in stocks and mutual funds, according to the Fed data, which runs through the end of June. The 0.1% now control about $28 trillion, or about 15% of the nation’s total wealth, which amounts to nearly $186 trillion.

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From CNBC via Grant’s:

The Federal Reserve’s next move could be to cut rates, despite markets widely expecting another hike, according to Scott Chronert, head of U.S. equity strategy at Citi Research

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“I am the house now” – Scott Bessent​

So much for the less forward guidance Warsh promised…​

Every day is like this.



Incomplete List of FOMC member comments from just one day!

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When has the Fed ever foreseen systemic risk?​

Fed policies ARE the systemic risk.

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Clown World:​

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Thoughts on the Anthropic IPO​

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No.​

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I saw this:




…and it reminded me of the Dotcom days.

I asked SuperGrok for a historic similarity:


Lucent is the textbook case. From the late 1990s Lucent financed shaky carriers so they would buy Lucent gear and keep reported growth in the 20% range. By September 30, 2000 its vendor-financing book was about $8.1 billion, much of it to startups. Commitments that year were about $5.7 billion. Winstar alone had a facility of up to $2 billion; it filed for bankruptcy in 2001 and Lucent was left with roughly $500 million of bad loans, then got sued for $10 billion. One.Tel, Leap Wireless and others followed. Lucent later restated $679 million of revenue, reported an $8.8 billion quarterly loss in October 2001, and losses for that year ran past $16 billion. The stock went from about $80 in early 2000 to the low single digits. A Lucent credit analyst later estimated that more than half of the company’s problems came from vendor financing. Cisco and Nortel ran the same playbook and took large hits; Cisco survived because the rest of the business was stronger.

“Eager to keep impressing Wall Street with steroidal growth numbers and counting all manner of nascent start-ups and emerging companies among its potential customers, Lucent apparently developed a habit over the years of goosing up its sales with so-called vendor-financing arrangements, in which Lucent would lend customers the money to buy equipment and sometimes install it too.

Then there were the discounts — offering some of its biggest customers deep discounts to make purchases they might otherwise have postponed until a later quarter. This would help Lucent boost its revenue numbers in the quarter when they needed a boost; problem was, Lucent’s business continue to sag, at which the discounts came back to haunt them.

Which all led in part to December’s $679 million “revenue recognition” mea culpa, in which Lucent essentially had to face the music for on-credit purchases that fell through.”

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This is from late December 1999, on the Silicon Investor message board, a goldmine of financial history. The last couple sentences are precious. Lucent and Nortel went away and it took many years for Cisco to finally pass its 2000 high:




Joe Kernen was terrible back in 1999 too. This is from Bill Fleckenstein:


Bear Attacks . . . (March 12, 1999) I was dumbfounded to watch Joe Kernen go after Bob Olstein of Olstein Financial Reports on CNBC’s Squawk Box early this morning. Bob was going through accounting machinations and the book cooking that has been going on at Lucent (LU), warning folks about how illusory their earnings and earnings growth has been. Kernen promptly took him to task by saying, “Well, we know all that. Nobody cares – the price is where it is.” Joe went on to make the point that anyone who talks about these things – and then the stock goes up – is just plain wrong. Therefore, anyone who has been negative is simply wrong because the market has gone up.


“Successful investing is about having people agree with you… later.” – Jim Grant




This is from the aptly named Smartmoney site in November 2000:

Some of our pundits believe there’s no point in trying to time the market,
since peaks and valleys are only clearly seen in hindsight. PaineWebber’s
Kerschner thinks investors should stick with fundamentals and leave the
reading of the tea leaves to day traders. “It’s not about calling market
bottoms,” Kerschner says. “It’s about identifying levels of attractive
valuations.”

According to Kerschner’s models, there are some great values in
technology out there. Established big-cap companies with earnings have
fallen to an average price-to-earnings multiple of 37 times this year’s
earnings, he says – and that’s far too low. “This multiple implies a long-term
earnings growth rate of 9% for a group of companies whose average
growth rate is 23%,” he says. He’s chosen 10 stocks from his highlighted
stocks list that he believes are extremely attractive: America Online (AOL),
Cisco Systems (CSCO), Hewlett-Packard (HWP), IBM (IBM), Lucent
Technologies (LU), Microsoft (MSFT), Motorola (MOT), Nextel
(NXTL), Nortel Networks (NT), Oracle (ORCL) and WorldCom
(WCOM).

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Global Crossing​

TEN Reasons to Buy GBLX Now: (revised 10/16/99)

Hope this brightens your weekend. Still as valid as when I first published it a month ago, when GBLX was at $23. Updated for your enjoyment……

1. Frontier merger. This acquisition is immediately additive to earnings. It serves to link Global Crossing’s undersea cables with Frontier’s extensive network of terrestrial cabling across the United States. Also, Frontier brings services to the Global table. Global Crossing is not satisfied with operating the toll booth on the information super highway; they want to repair the road and service vehicles moving along on it. Frontier enables Global to do all that.

2. Microsoft and Softbank backing. These two giants (in market cap alone) will ensure success for Global Crossing. If you look at the structuring of their arrangement, you realize they are forced to pony up more and more money as the market cap of Global grows. The effect will be a logarithmic increase in GBLX share price for the next three years.

3. “Lock” on insider sales for six months past merger. Both Frontier and Global executives have pledged to keep 100 % of their shares for at least six months after the merger closes. In the recent Switzerland Conference, Winnick said “I’m not going anywhere and neither is my money. You ought to have great confidence that every thing I do is tied to investor return.”

4. Insider ownership. Winnick (AKA – “The Rainmaker”) owns 25% of Global Crossing. What is good for him as a shareholder is good for you. Enough said.

5. Fidelity Asset Management (FMR) ownership. FMR recently announced they have established a 5% stake in GBLX. They bought GBLX stock from $22-$28 a share. Did you?

6. $500 million stock buy back. Global has pledged to buy back at least half a billion…that’s with a “B”, folks…of it’s own stock after the merger. What better way to emphasize the bright future the board of directors sees for this company.

7. “First There” advantage. By being the first company to be a true global telecommunications enabler, Global Crossing has a distinct advantage shared by many extremely successful companies. Everyone else has to catch up and (take it from me) that’s a harder and harder thing to do in an industry where barriers to entry are a mile high and getting higher every day that interest rates go up.

8. Visionary leadership. Look at who is at the top of the Global pyramid. If you don’t know them, you better learn who they are. They are the future faces of telecommunications in the world. Winnick recently said “They will be writing books about what we have done in this industry.”

9. Lowest cost structure, most efficient business model, and technology only makes it cheaper. Global Crossing, when the network is complete, will have the lowest cost structure in the industry. It is THE most efficient business model I have ever seen. No longer do customers have to pay tolls for bandwidth as they transition across carrier networks…it’s like Club Med for bandwidth (you pay only once for everything). As WDM technology gets better, Global’s cost of providing bandwidth shrink exponentially, and they make money at an exponential rate.

10. Cause you want to have $1,000,000! This company will make at least $1.00 in earnings next year and $3.00 in 2001. What will the P/E be then? Still over 100 and you will be in Nassau or Hawaii, happily cashing your monthly money market dividends and wondering what color the sunset will be as you toast your good fortune.

Buy now or kick yourself for the rest of your life.

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“How much Global Crossing Chairman Gary Winnick reaped from selling his company stock in the three years before Global Crossing went bankrupt: $735 million”

I love how many act as if oil is the sole cause of inflation​

“Cooler than expected PCE”​

The horrific deflation is over. Buckle up!​

The Great David Dredge​

Dredge: “They’re not making anywhere near the effort to get back from three, three and a half percent to two that they were making to get from 1.8 to two.”
McKeown: “What is it? 63 months now, I think, in the US? It is almost ridiculous to call it a target. It has no meaning.”

• Also McKeown: “I’ve reached the conclusion that understanding Japan’s financial plumbing is a bit like quantum theory. If you say you understand it, you probably don’t. I’m happy to accept it’s just a black box.”
• Dredge: Russell Napier says “financial repression is the only thing they can do. And I say, well, that might be the only thing they try to do, but I’ll argue they’ve been doing financial repression for 20, 25 years – 30 years in Japan – but you’re not reducing debt to GDP like you did back in ‘50’s and ‘60’s – it’s been going up the whole time.”
• Dredge: “Owning bonds has been a disaster. They have not been an effective portfolio risk-mitigating diversifier, which comes back to my question: who’s going to buy the bonds? Because their efficacy has been laid bare.
  The guys that are selling them, you know, guys like you and me, sit around on podcasts talking about debasement and financial repression, as though it’s the only option they have. Well, if we figured that out, I’m guessing my friends who manage the FX reserves here in town have probably figured it out as well. Thus, maybe a bid for gold comes along.”

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How’s the consumer doing?​

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Sorry kids!​

FHFA US Home Price Index​

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• Case-Shiller agrees.

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Existing Home Sales Months Supply​

Back to 2015 levels.



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U.S.single-family rent prices increased 1.8% year over year in July 2026​

I know in some areas rents are falling (due to massive overbuilding in recent years), but overall, number go up.

Jason Furman is one of the Nassim Taleb calls “intellectual yet idiot” economists.​

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So the US GDP Deflator (seasonally-adjusted lol) is 6.1%, but the CPI (NSA) is 3.4%. Hmmm.

I know which one is a lot closer to the actually cost of living increase.

• “The theory behind [passive index investing] is pretty straightforward. Since you aren’t going to try to pick, you might as well just buy everything. And that unfortunately changes the character of investing quite substantially.”
• “A bond trading at 50 cents are one-third as attractive on a market cap-weighted basis as a bond that’s trading at 150, even if those two bonds have the exact same issuer and the exact same yield to maturity.”

Mike Green

Worse Than A Bank Failure: What Actually Happens When a Life Insurer Goes Bust​

“Andrew Granato, Assistant Professor of Law at the University of Texas at Austin, and Pranjal Drall, JD/PhD candidate at Yale, join Jack Farley to discuss their paper Private Credit’s State Backstop: How Private Equity Socializes Risk Through Insurers”

A couple of academics who can actually communicate with normal people. Rare.

“So right now the holding companies of these insurance companies that also own the alternative asset management firms, Apollo, KKR – you’re saying that if the insurance entity dissolved and went essentially bankrupt, even though they don’t go bankrupt, that KKR, Apollo, or the parent company would have no obligation to make things whole. Is that what you’re saying?

“They have zero obligation to make things whole. And you can see that in Athene investor presentations.”

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From the paper:

“In life insurers, PE has found an ideal host body from which to issue illiquid, risky, and opaque private credit investments…the guaranty-fund insolvency allocation system that permits PE firms to socialize the downside risk of their private credit portfolios without a sufficient financial-regulation regime to stop them. Publicly-traded private-credit funds like BDCs may experience sharp volatility, but when they go down, the losses are borne by their investors who accepted that they were taking on risk. When a private credit-loaded life insurer becomes insolvent, it is mostly taxpayers who must pay for it”

Jeff Gundlach on Payment-In-Kind​

“The private credit default rate for the last 12 months is reported to be 6.3%. It’s been rising slowly month by month, but it it’s much worse than that, because that 6.3% does not include the payment-in-kind labels, and there’s a lot of pay-in-kind going on.

Pay-in-kind is the most insidious thing you could possibly imagine. You’ve got a company, okay? Lend them $100, and it’s 10% interest, and they pay you once a year. Make life easy, all right? So, they don’t have the $10 at the end of the first year. So, you say, “You know what? We’re going to write down that you paid us, but we we’re not booking any cash. We’re just going to put the principal value up to $110.” And this is now reported as a performing loan. This is a loan that is on its way to default, because if they can’t pay 10% on a $100, something really good has to happen for them to be able to pay the 10% on the $110. So it’s gone from $100 to $110. And that that just keeps compounding as you go on.

So what happens is the private credit companies, they actually – you ready for this? – they mark the value of their portfolio up because the bonds – not everybody does this, but the rapscallions do, and there’s a there’s enough of them – what they do is they mark the value of the position up to $110. They report a 10% profit because a company has admitted that they’re in bankruptcy threat. They’re in threat of bankruptcy. So you’re up 10% on your reported NAV. This is criminal. I mean that loan is worth best 60 cents on the dollar once it starts PIK, on a good day. So this thing is overmarked by almost 100%. And there’s more than 10% of private credit that’s in PIK-mode right now, and it’s heading to 15% fairly quickly.”





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“We will abolish the deep state, we will expel the warmongers from our government, we will drive out the globalists”​

– Donald Trump



“Crime, once exposed, has no refuge but in audacity.” – Tacitus

North Korea is laughing at us.​

Review of “Empire of Pain: The Secret History of the Sackler Dynasty”​

Empire of Pain: The Secret History of the Sackler Dynasty (4/5)

“The Sackler family fought an opium war against the United States – and won! That’s how weak the state was twenty years ago, so we shouldn’t be surprised that it is now losing a war to Iran. They were so arrogant and careless that they did lose the company (Purdue) and had to pay billions of dollars out of pocket (in installments), but the family members were never charged with crimes and had enough left over that they still have significant family offices.

The founder of the family, Arthur Sackler (1913-1987), basically invented pharmaceutical advertising and was an early and aggressive practitioner of direct sales to physicians using reps. He took over a medical advertising agency (William Douglas McAdams), he organized his brothers’ purchase of a pharmaceutical manufacturer (Purdue), and he also became a publisher and started a weekly medical newspaper in 1960, the Medical Tribune. He was also a silent owner of the other competing medical ad agency (L. W. Frolich) and other medical publications.

The family was very secretive about what they owned, but at the same time they liked having their name slathered all over art museums and educational institutions. They were very frank about how philanthropy is different than charity – it was an investment in status and power. (And buying protection against criticism.)

Of course, the publications shilled the products that his pharma company and ad agency clients were selling. The family was very good at regulatory capture. Purdue hired the FDA reviewer who approved OxyContin right after he “retired.”

Arthur Sackler was married three times, unceremoniously abandoning his first two wives when he spotted something better. His younger brother Mortimer was married three times and had children with all three. The other brother Raymond only had one wife, but his son Richard (b 1945) is the main villain in the story. Richard is the boomer who took over from his father and got the family into opiates.

Highlights: Arthur’s daughter asking him to play with her. “I’m going to wait until you’re an adult. Then I’ll have a conversation with you.” “[T]he commercial life span of a branded drug is the short interval between when you start marketing it and the point when you lose patent exclusivity. Roche and Arthur didn’t need to fight off regulation forever; they just needed to hold it off until the patents had run out.” “The Sackler empire is a completely integrated operation. They could develop a drug, have it clinically tested, secure favorable reports from the doctors and hospitals with which they had connections, devise an advertising campaign in their agency, publish the clinical articles and the advertisements in their own medical journals, and use their public relations muscle to place articles in newspaper and magazines.”

The Republican presidential administrations – Reagan, George W. Bush, and Trump – were particularly malleable when Sacklers needed forbearance. Also, the Republican state attorneys general were more interested in quickly settling the Purdue lawsuits. There were also Republicans like Rudolph Giuliani who took money to intervene for Purdue at key moments and keep the racket going.

“A doctor who wrote a lot of painkiller prescriptions was a priceless commodity. Like casino employees talking about an especially profligate gambler, the sales reps referred to these doctors as ‘whales.’” Another Sackler family strategy was to fund advocacy groups for pain patients. “On the very day that the patent for the original formulation [of OxyContin] was set to expire, the FDA, ever obliging, declared that the benefits of the old version of OxyContin ‘no longer outweigh’ the risks,” which meant that no one could produce a generic version! “

The Sacklers’ impulse to slap their name on any bequest, no matter how large or small, might have found its surreal culmination at the Tate Modern…in which a silver plaque informs visitors that they happen to be riding on the Sackler Escalator.” “One unadvertised hazard in the life of a plutocrat is that the people around you can be prone to yes-man sycophancy. In theory, you should be able to avail yourself of state-of-the-art counsel. But instead, you often get lousy advice, because your courtiers are careful to tell you only what they think you want to hear.”

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See also:

• The Sacklers, Who Made Billions From OxyContin, Win Immunity From Opioid Lawsuits
• “Purdue’s bankruptcy deal shields Sackler family owners from future opioid liability.” Street-level dealers don’t generally get these kinds of deals.
• Dopesick. Excellent series.
• The Pharmacist. Another good series.

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[ H/T The Burning Platform ]